Stock Market Fear is Tapering, Greed is Back

An overconfident market should strike some fear, but these ETFs say it doesn't

The stock market’s wild mood swings from fear to greed and back are in full swing again. And this time around, the investing public’s fear of missing out on potential stock gains is greater than its fear of losing money.

The latest Fear and Greed Index shows that stock market greed is now at extreme levels, near 80. In a span of just one-month, extreme fear, near 15, has been replaced by extreme confidence. An electronic circus indeed.

Equities have beaten the performance of bonds (TLT) by 7.64% over the last 20 trading days. That’s the strongest performance for stocks relative to bonds over the past two years. It’s also a signal that investors have rotated away from the relative safety of bonds (BOND) into stocks.

It’s a good time to remember Warren Buffett’s classic rule: ”Be fearful when others are greedy, and be greedy when others are fearful.” But never mind that, because this time is different, right?

The S&P 500’s (VOO) 60-month advance has lifted the index by around 177%. By comparison, the average bull market since 1921 has risen roughly 180% and lasted just 62 months.

Higher money flows into stock mutual funds (FCNTX) and ETF (SCHB) is another sign of increasing enthusiasm for stocks by the public.

According to the Annual Global Flows Report, stock funds (FKGRX) experienced capital inflows of $567 billion globally and an organic growth rate of 6%, the fastest since Morningstar began tracking worldwide flow data in 2007. The report examines 2013 mutual fund and ETF asset flows in five key markets – Australia, Canada, Europe, Japan, and the United States.

Although readings of stock market greed are at extreme levels, greedy can become greedier. As stocks continue marching higher, further distortions in trajectory, valuation, along with the duration of the rally are almost a given.

The ETF Profit Strategy Newsletter uses technical, fundamental, and sentiment analysis along with market history and common sense to keep investors on the right side of the market. In 2013, 70% of our weekly ETF picks were gainers.